Introducing our income stock portfolio

This new model income portfolio aims to deliver an 8% return over a 12-month period.

PORTFOLIO POINT: This new income stock portfolio aims to deliver returns of 8% over a 12-month period.

Following last week’s launch of Clime’s model growth portfolio, I introduce an income portfolio which combines the expected income returns from listed debt, hybrid securities and high-yielding equities.

With market volatility looking increasingly persistent, Clime is often requested by clients to create an income-focused portfolio that attempts to minimise volatility while generating a better return than bank term deposits. Many of our clients are positioned in self-managed superannuation funds. They are retired or fast approaching retirement, and are therefore seeking some assurance that they can maintain a sufficient capital base from which to produce an acceptable income stream.

The ability to create a high-yielding listed security portfolio has been enhanced by the significant expansion of the listed hybrid and debt market over the last six months. This expansion has been in direct response to significant demand for income from an ageing SMSF investment community. There is significant competition for passive investment funds in the bank term deposit market, but rates are declining and markets are anticipating downward adjustment by the Reserve Bank. Further, there has been a significant rally in Australian bonds, as their security in a world where many sovereign bonds are of questionable status seems assured.

All of these influences, plus the massive liquidity injections of central banks around the world, are forcing more investment funds to seek out sustainable yields. However, yield is one part of the investment equation and the other is risk. So what we intend to achieve with our portfolio is a proper balance.

The Clime Model Income Portfolio

The Clime model income portfolio is constructed with the aim of achieving a targeted return of 8.0 % over a 12-month period. The return will be predominantly from income, but there is potential for capital gain. By blending the securities and seeking franking enhancements, the desired return is achievable, but with a clearly higher risk than say a bond or pure bank-debt portfolio. The acquisition of the securities is not subject to market timing and the intention is to hold securities for as long as they represent value.

The portfolio consists of 12 securities and includes listed debt securities, hybrid securities and high-yielding equities. The investments are equally weighted in the portfolio. Rotation of the portfolio may occur if a security:
1. Has made a public announcement that affects the valuation or the outlook for the security; or
2. Has moved significantly in price, well above that which is regarded as fair value; and/or
3. Is replaceable by another security that offers much more compelling value.

Readers should note that the portfolio will be subject to market price moves and that capital is not guaranteed. However, by taking a medium-term hold approach, the desired returns should occur.

I will remain alert to market announcements or movements in interest rates or spreads, and will make significant market-related events known each fortnight in my review of the portfolio.

The Portfolio

I note that the 10-year Australian bond is currently about 3.7% and thus I believe that a blended income portfolio (as below) should target about 4% p.a. higher returns, due to the increased risk of the portfolio.

-Hybrids/Pseudo Debt Securities
Company ASX
Market Price
($)
Margin over BBSW
Running Yield
(%)
Franking
(%)
Total Return
(%)
ANZ Note ANZHA
100.91
2.75
6.78
0
0
Multiplex SITES MXUPA
76.5
3.90
10.44
0
0
Australand
ASSETS
AAZPB
92
4.80
9.66
0
0
Macquarie Group
Floating Rate Note
MBLHB
67
1.70
8.64
0
0
NAB Floating Rate
Note
NABHA
73.68
1.25
7.25
0
0
Seven Group
TELYS4
SVWPA
88.7
4.75
9.94
100
0
Woolworths
Notes II
WOWHC
105.05
3.25
6.99
100
0
Ramsay Health
Care CARES
RHCPA
101.75
4.85
8.77
100
0
-High-Yielding Equities
Company ASX
Market Price
($)
Dividend
($)
GUDY
(%)
Franking (%)
Total Return (%)
Telstra Corp TLS
3.54
0.28
11.30
100
0
Ardent Leisure
Group
AAD
1.24
0.12
9.68
0
0
Commonwealth
Bank
CBA
51.66
3.29
9.1
100
0
Westpac Banking
Corp
WBC
22.67
1.63
10.27
100
0
 
Average
9.07
Weighted
0
Yield
Portfolio Return

* Prices as at market close April 26 2012.

Explanation of Portfolio Terms

Margin over bank bill swap rate (BBSW). Distributions paid on hybrid securities are often priced at a margin above the 90 or 180 day BBSW. As the BBSW can fluctuate, knowing the margin allows an investor to determine what yield they will be receiving.

Running yield. The yield on an investment, based on current prices.

GUDY. 'Grossed Up Dividend Yield’: Dividend yield grossed up to account for franking.

Total Return. The return to investors inclusive of both capital movement and distributions.

My fortnightly review

Each fortnight, I will review the portfolio and highlight a security. There are many terms in listed hybrid securities that need to be understood. Further, the income paid to the holders is generated from the operations of the issuing companies. Thus, a review of their financial performance and health will also be a constant focus.

Clime Investment Management is one of Australia’s top performing fund managers specialising in income and growth portfolios for wholesale and sophisticated investors, particularly self-managed super funds. Register here for a complimentary portfolio assessment.

* The portfolio assessment only provides general information and does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment or personal advice. Under no circumstances should investments be based solely on the information herein as they are of a general nature.

Related Articles